Banking Credit Model

Overview

Credit Risk is one of the primary risks faced by a bank. The davinci bank credit model includes methods to measure and model the credit risk of a banks portfolio of loans.

Probability of Default

The Probability of Default measures how likely an obligor is to default on an obligation. There are various ways to try to measure PD (probability of default), depending on the assumptions made.

• Homogenous Model - The homegenous model simplifies the problem of credit risk by assuming that all loan defaults are drawn from the same statistical distribution. This not only simplifies the math, but it increases the sample size.
• Heterogenous Model - The heterogenous model assumes that there are different distributions for which the defaults of the loans in a portfolio are drawn.
• Transition Matrices

Economic Capital

Economic Capital is a theoretical measure of how much capital a bank needs to hold in order to maintain an appropriate buffer against potential losses.

• Basel Advanced IRB - one of the primary frameworks used to measure economic capital
• Monte Carlo VAR - an alternative method that utilizes simulations to arrive at a capital figure. Can accomodate a broad range of assumptions.

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